North America-Based Investors Investing in Open-Ended Real Estate Funds – February 2015

by Brian Chung

  • 19 Feb 2015
  • RE

Preqin’s Real Estate Online service currently tracks 947 institutional investors committing capital to open-ended real estate funds. These investors have aggregate assets under management (AUM) of more than $13tn and, on average, allocate 7% of total assets to real estate, below their average target allocation of 8%.

Real Estate Online also tracks 415 open-ended real estate funds, offering investors a range of strategies. Lower-risk strategies, including core and core-plus, represent 80% of open-ended real estate funds tracked by Preqin. Funds following higher-risk strategies such as value-added and opportunistic represent 8% and 5% of open-ended real estate funds respectively. Debt and distressed funds constitute the remaining 7% of open-ended real estate funds. A majority of these real estate funds (63%) will invest in a range of property types, effectively diversifying their assets. Open-ended funds targeting residential real estate assets as a primary focus account for 11% of funds, with office properties and retail properties as a primary focus each accounting for 8%. The remaining 10% of open-ended real estate funds primarily target hotel, industrial and niche properties, as well as land and operating companies. 

Institutional investors committing capital to open-ended real estate funds have invested in the asset class through a variety of methods. Fifty-six percent of North America-based LPs investing in open-ended real estate funds only commit to private real estate funds. Publicly listed real estate investment trusts (REITs) are utilized by 34% of investors, with direct real estate investments targeted by 19% of North America-based investors.  Of these investors, 46% currently allocate between 5% and 9.9% of their portfolios to the asset class. Thirty percent allocate between 1% and 4.9%, and 2% allocate less than 1% of total assets to real estate. Current allocations between 10% and 14.9% account for 18% of these investors, while 4% allocate approximately 15% or more of total assets to real estate. In the next 12 months, North America-based investors will continue to commit to open-ended real estate funds, with high-return strategies, which are less likely to be open-ended, as the most sought-after fund strategy. Value-added and opportunistic funds will be targeted by 65% and 54% of investors respectively. Core strategies, more commonly adopted by open-ended real estate funds, will be targeted by 49% of investors, with core-plus strategies targeted by 23%. Debt and distressed strategies will be considered by 13% and 11% of LPs respectively.

In regards to geography, these investors will allocate capital to a variety of regions over the next 12 months. North America-focused funds will be sought by 84% of these investors and Europe-focused funds will attract 36%. Real estate funds investing on a global basis will attract 30% of these LPs and Asia-focused funds will be targeted by 20%. 

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